10 Important Financial Lessons Every Person Should Know

Brian Pybus, Thursday, January 15, 2015

10 IMPORTANT FINANCIAL LESSONS EVERY PERSON SHOULD KNOW

During my years at the Canada Revenue Agency – back then it was known simply as Revenue Canada – I met a lot of people. Some wanted information or sought assistance. Others were taxpayers who had fallen behind. Still others represented taxpayers who were having difficulties with the CRA. Occasionally someone would come by who wanted to help a friend or relative or employee by paying their outstanding taxes for them (it happens, and more often than you may think).

They were a wildly varied bunch. Many were 9 to 5 workers, there were immigrants and singles, entrepreneurs who repeatedly made and lost and again made small fortunes, professionals, community leaders, retirees. A few were public figures. Some worked in occupations I had never imagined existed, and others did remarkably simple jobs yet were paid extremely well. One fellow lived a modest life in an unprepossessing house in East Vancouver, yet was worth in excess of $300 million – and that was in the 1990s. Another was a bodyguard, for just one local businessman, and travelled all over the world. And so on.

Each had a story to tell. Surprisingly, seldom did any of them have similar tales. In the course of different conversations you might learn about some weird custom in some village in some obscure part of the world, or the intricacies of assembling a particular device in a factory in the industrial part of town, or exactly how marriages are arranged, or impressions of famous people that he or she has met as a chauffeur, or the very best way to prepare a veal dish. Once you got past whatever tax issue we were dealing with and became more casual, they would often just talk and talk. It was a lot of fun. You never knew what to expect, but they sure made an often mundane job more interesting.

The retired men almost always wanted to talk about money. Their money. There was the usual stuff about what they had done to make it, how they had saved and invested and what they had sacrificed along the way. Some of them may have had tax issues, but aside from that there was always a quiet pride in what they had achieved in their lives. It was basically the stuff we all do: marry, raise kids, buy a house, save. We all share a common sense of achievement by actually doing these things. It doesn’t matter a whole lot whether we live in a small house or a mansion, or whether we make $30,000 a year or $300,000, or we can afford to vacation in Europe or at the local beach. The rest of the world doesn’t matter nearly as much as the feeling of accomplishment, of having built something ourselves. Our lives are creative things. That’s what these guys were saying.

These fellows may have taken different routes to get where they were and achieve what they did, but there were surprisingly common themes to their stories. Each of them learned things over the years which served them well. The following are the top ten financial lessons that all of them shared.

Start and maintain a budget. This was deemed the single most invaluable financial tool. It was important to know how much was coming in, yes, but even more important to know what was going out. Watching the pennies was a means to an end: car, house, education, vacations and savings. They early on realized the importance of tracking exactly where the money was going and, more importantly, where it should be going.

Set financial goals and work toward them: When to buy a house? Saving for the kids’ education. When to retire? How much to set aside? What’s a priority?

Build an emergency fund: This was the number one financial goal. It was like an insurance policy in the event of the unexpected, like unemployment or illness. The consensus was to have at least six months of living expenses – rent or mortgage, food, utilities, etc. – safely tucked away at the bank, in high interest deposits that are not locked in.

It’s never too early to invest in your retirement: All put away something out of their income each month for the long term, and started this habit when first starting out. This was in addition to the RRSPs they invested in. The money put aside was considered untouchable. Some of them got into conventional savings instruments like GICs, others were more savvy and ventured into equities and eventually even revenue property. Others relied on financial planners to help them. .

Health insurance is an investment too: Provincial Medical Services plans cover some things but not everything. Supplemental insurance coverage for dental, some drug expenses and on-going health related needs is important not only for the family’s income earner(s) but also for all family members. Life and disability insurances are also important considerations. Together these plans were considered a smart investment against future problems.

Credit is a double-edged sword: With the exception of buying a house, the sentiment was buy everything with cash. That included even big ticket items like a vehicle. There was no paying interest just to get something right away: if they didn’t have the cash they simply didn’t buy what they needed. That said, they recognized that enjoying a good credit rating was important. It was also important to have at least one credit card. So there was nothing wrong with using the credit card so long as the balance was paid off each month in full. If not, then there were interest charges and possibly user fees to deal with, both being big negatives.

Know how to file your income tax return: All understood the fundamentals of tax return preparation (it really isn’t that difficult). Most did their own income tax preparation. Some with more complex situations relied on a tax preparer. They all filed on time every year.

Look before you leap: Caution in everything they did governed their lives. If there was another better job available, they didn’t just walk away from the current job before getting the second one. In buying a house, or a car or just about anything, they had a checklist of needs and wants: they could always compromise on the wants but never on the needs. They were never afraid to for the opinions of others when considering a course of action. They questioned the consequences of everything they did: should I/would I do this or that? what could/would happen if I chose B over A?

Learn not to waste: They themselves lived modesty, austerity and thrift being virtues of the highest order. Waste was a bad word – they practically invented recycling. A functional car – never new, by the way; simple fare; hobbies and interests which cost little. Yet for the family, there was nothing they couldn’t have if they wanted it.

Don’t forget the purpose of the budget: We’ve come full circle with a return to the budget. To them the budget was the map, the guidepost, the foolproof plan to whatever it was they wanted. They shared an absolute faith in their respective budgets getting them from A to Z. It was just a question of prioritizing needs to be met and having the discipline to allocate sufficient funds each month towards meeting those needs.

These are some of the financial lessons gained from my time at Revenue Canada. I think they’re important because most people who have reached retirement seemed to have followed them with a good deal of satisfaction.